108 ANALYSIS: Sustainability in industrial real estate development and investment

The industrial real estate segment has not been perceived as a model of responsible development for many years. However, this is changing rapidly thanks to, among other things, the shift in company values, the economy and the key stakeholders themselves in industrial real estate: developers, tenants, investors and banks. European regulation aiming to reduce the production of greenhouse gases and the carbon footprint in general is also playing a major role in the market shift. All this is demonstrated by the new analysis from the real estate advisory company 108 AGENCY. It shows how this area of the real estate market has undergone progressive development since 2010, when the first industrial building in the Czech Republic received green building certificate.

Development of agricultural land, increased weight of traffic, limited interest in the impact on the environment, which is also expressed by "box-type" architecture. The industrial real estate segment has not  been perceived as a model of responsible development for many years. However, this is changing rapidly thanks to, among other things, the shift in company values, the economy and the key stakeholders themselves in industrial real estate: developers, tenants, investors and banks. European regulation aiming to reduce the production of greenhouse gases and the carbon footprint in general is also playing a major role in the market shift. All this is demonstrated by the new analysis from the real estate advisory company 108 AGENCY. It shows how this area of the real estate market has undergone progressive development since 2010, when the first industrial building in the Czech Republic – Hills Pet Nutrition in Hustopeče – received LEED Gold green building certificate.

"The data we collected will come as a surprise to many. In a number of areas, it is precisely the developers of industrial premises who bring green and energy saving innovations to the local environment – with speed and scale. The conversion of brownfields which can't be utilised for residential construction, the use of renewable energy sources or the smart technical equipment of buildings aimed at savings is inspiring for other areas of the real estate market in a number of implementations," summarised Lenka Šindelářová, the author of the study, from the investment department of 108 AGENCY.

The analysis focussed primarily on green building certification. It is a respected parameter which serves as a comparison for financing banks, tenants and investors, who also often use external bank financing. Mid-2022, 49% of completed industrial buildings in the Czech Republic were certified by a green building certification system. With the development of the market, the share of certified buildings will increase significantly, as the vast majority of new or planned construction already have intentions for certification. Most of the buildings in the Czech Republic were already certified in the phase of operation and use. BREEAM remains the predominant certification on the domestic real estate market.

The turning point for the certification of industrial premises was in the year 2020. Until then, mostly stand-alone and owner-occupied buildings were certified, that year CTP, the dominant player on the local industrial space market had its entire real estate portfolio certified. This has led to a significant increase in certified objects on the market All other major warehouse real estate developers have also certified their portfolios in the last two years.

This trend further accelerated from the autumn of 2021, when energy prices began to rise. "Whether it was due to the influence of banks, tenants, investors or down to their own decisions, it was the developers of industrial real estate who responded very flexibly to the challenges of the energy crisis and the deadlines for climate commitments in Europe. We see a real effort to achieve operational savings in the field of commercial development, with the installation of photovoltaics, heat pumps, rainwater or waste water retention and filtration systems," says Lenka Šindelářová. The reasons also include the responsible approach of banks, which are reluctant to finance the construction of buildings which do not prove their sustainability. End buyers - investors - would then also have difficulty to access financing.

Pressured both by tenants, as well as companies investing in occupied industrial spaces, developers focus on sustainable construction and environmentally friendly operation. Additionally, given strongly rising energy prices, the number of industrial premises which are trying to reduce dependence on gas to a minimum level is increasing. Developers are pushing for installation of photovoltaic panels, supported by legislation and heat pumps. First projects of so-called off-grid or island energy systems, without external supplies and sources, are also appearing. Other key trends in industrial real estate are savings in water consumption by utilisation of rain and waste water, by installing retention tanks or root zone treatment plants, as well as planting greenery, increasing bio-diversity and brownfield regeneration.

"All of these measures have one common denominator, which is the reduction of the carbon footprint. Sustainable building also demonstrate considerable operational savings. For many tenants, this is a main condition for the selection of space. In the case of developers and investors, there is a demonstrable effect of certification or fulfillment of ESG criteria on the value of real estate.  In the case of sustainable green real estate, higher occupancy and retention of tenants, higher rents and lower operating costs are some of the benefits attributed to it. Therefore, these properties will maintain their competitiveness even in comparison with new buildings, which will be developed in accordance with the ever-tightening ESG regulations. Even older real estate can achieve significant energy savings and an increase in value through smart investments," adds Lenka Šindelářová.

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